How Do I Estimate My Business’s Work Comp Rates?

Workers’ compensation is an extremely important part of insuring your business and protecting your team. In fact, every state except for Texas and New Jersey requires employers to have some form of workers’ comp coverage (New Jersey also has regulations that make it required for most businesses). It is also estimated that employers spend $1 billion per week in work comp costs.¹

But many businesses don’t understand the calculation of their work comp policy premium. To help you better understand this process, let’s take a look at the “formula” involved, but keep in mind that other factors may come into play.

It All Starts with Payroll

Your payroll is the starting point for calculating your workers’ comp premiums. For every $100 of taxable wages you pay on payroll, you will be charged an amount for work comp coverage. What amount? Let’s take the next step to find out.

Employee Class Code/Rate

For every employee, there is a 4-digit class code assigned to work they perform. In most states, including Florida and Tennessee, the rates for those codes are determined by the National Council on Compensation Insurance (NCCI).² In theory, the rate should correspond to the risk the employee has based on their job role. For example, an administrative worker may have a rate of $0.15, while a manufacturing worker may have a rate of $15.

Experience Modification Factor

You may also hear this referred to as an Experience Mod, Experience Mod Rate, or just a Mod. What is it? It is a factor based on the comparison of your business to others in your industry. How old is your business? How frequently have you had work comp claims? How severe have those claims been? These are the factors that will impact your Mod.

The average Mod is 1.0, so your business will be higher or lower depending on the circumstances. If you have a good business history with minimal and less severe claims, you will likely have a Mod lower than 1.0. For example, a 0.90 Mod would give your business a 10% credit. Conversely, a 1.10 Mod would add a 10% debit to your work comp rates.

The Formula

Now that we have some moving pieces, what’s the formula? If you’d like to estimate your business’s work comp rates, plug in your numbers to this equation:
Class Code Rate x Experience Mod x (Payroll/100) = Rate Estimate

This formula will give you an estimate for your company’s work comp premiums. Other factors, like the Loss Cost Multiplier an insurance company applies to the rate, may also have an impact.

Workers’ comp can be a complicated coverage, but it doesn’t have to be. Having the right PEO relationship can help give you options, and we can help you find the right relationship for your business!

1 – 2019 data according to Propel HR
2 – Map of NCCI states: https://www.ncci.com/pages/au_nccistatemap.aspx